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New Arguments that Supposedly Prove General Gluts Possible.

Background: J.B. Say argued that a general glut is impossible, unlike what Keynes and others thought. Callahan thinks he found a simple example where Say is wrong.

Gist of Gene Callahan’s argument:Three people on a desert island. They catch more fish than they can possibly eat. General Glut right there.

Sorry Gene. You forgot why the word “general” is in the phrase “general glut”. The thing is, Say admitted the possibility that some items could be mistakenly overproduced, but not all. What you did is erase the distinction by making up an imaginary economy with only one item. So that in your Bizzaro World example, “some” and “all” and “only one” are the same. Come back and show us an economy with at least two products, [and more importantly, division of labor], and then we’ll talk.

To give you an idea of how bizarre Callahan’s model is, imagine if he was trying to model marriage with a simplified universe of Robinson Crusoe alone on island. Gene, it doesn’t work like that. Marriage requires two people minimum. You can’t model marriage with just one person.

Same thing for a general glut. The very word “general” means that there are many items in our economy. You cannot model that with a one commodity economy.

And it’s not just words here. Say was arguing that products trade for products, ergo there cannot be a general glut. How can you model “products trading for products” in a one commodity economy? You can’t, Gene.

Bob Murphy, however was very impressed with Callahan’s argument, and indeed generalized it to an economy with many products. His argument goes like this:

So what happens during a depression? Well–the typical free-market economist would say–it’s not that every firm produced too much. Rather, it’s that some firms produced too much, but others produced too little. So resources weren’t properly allocated across industries, and that’s why the resulting mix of output is “wrong.”

Oh me, oh my. Bob, have you forgotten Austrian Business Cycle Theory? Have you never heard of malinvestments? The problem is not a “wrong mix”. The problem is malinvestments.

In other words, the damage to the economy has been done. Resources were wasted. The country is a mess. Malinvestments, if not stopped dead and killed off, will keep doing more of the same. But there is no need to change the price of anything to kill them off. Just let the malinvestments go bankrupt of their own accord, and everything will take care of itself. After all, a malinvestment is something that will go bankrupt once the money stops getting printed, right? By definition, right?

Like a bad move in a chess game, Bob’s first mistake leads to bigger ones:

The way to fix things is for prices to move. If businesses consistently hold too much inventory, and can’t hire workers, the problem is that the price of the inventory is too high, and wages need to fall.

Oh me, oh my. Bob, have you forgotten Austrian Business Cycle Theory? The problem is not prices and wages, the problem is malinvestments. They have to be liquidated. Wages do not have to fall, the price of inventory does not have to drop. The same workers at the same wage, and the same inventory at the same price, just have to go around the corner to work for a company that is not malinvesting.

Of course, once the malinvestments cease to exist, wage will drop for a while and price of inventories will as well, because their demand has been reduced initially because the malinvesting companies are not competing for them [since they are dead]. But that is the result of the cure, which is elimination of malinvestments, not the cause.

Bob continues:

The free-market economists who argue that “a general glut is impossible” are overlooking the fact that the economy might not exploit every resource to its fullest potential in a given period. For example, laborers don’t usually work an entire year at their maximum physically sustainable level. Instead, they typically choose to consume large amounts of leisure.

Bob, have you even read Say’s Law? Take a given amount of work, be it maximum physically sustainable level, or much less, it doesn’t matter. That amount of work produces amount A of production. Put aside the production that is not true production, aka malinvestments, because they are a lost cause. Certainly the whole economy is not one huge malinvestment, right? So we have now B units produced. Now go read up on Say’s Law and find out that those B units produced are things people want to buy, meaning the producers of those things will be able to trade. Unlike Gene Callahan’s fish, those B units are not all the same. Some are fish, some are chicken, some are laptops, in fact you have a whole shopping mall’s smorgasbord of stuff, all desired by someone and so trade-able. The fish will be traded for chicken, etc.

By the same token, industries never extract all the oil, natural gas, and other minerals from our stockpiles in a given year. Instead, far less is devoted to current production, and the vast majority of it is carried forward into the next year.

Same mistake as with the workers. Same rebuttal.

Murphy thinks that his work here is done:

Once we take these elementary facts into account, we see the weakness in the claim that a “general overproduction is impossible.”

Sorry, Bob. What were you thinking?

EDIT, 4/11/13: Bob told us what he was thinking today. First, his feelings were hurt that I used his first name. Second, he photocopied Say’s Law. Third, he does not feel like helping me see the light.

Bob, you got it all wrong. I am helping you see the light. I have laid out a line of reasoning from first principles [assuming rudimentary concepts of Austrian Economics]. You have been led to water. Drink, or show us where my mistake is.

Also, just to make sure it is crystal clear how Say’s Law works here, I’ll spell it allout in detail.

Say’s Law applies no matter if resources are exploited to their full potential or not. That’s because it talks about the bottom line [=what was produced], not how we got to that bottom line [= what resources were or were not exploited to produce things]. Given that desired resource X was produced, whether or not the economy exploited every resource to its full potential, that creates purchasing power in the hands of the producer of X to buy some of resources Y, Z, etc. Apply the same reasoning to desired resource Y, Z etc in turn. Now add up all the purchasing power in the hands of these producers, and you have exactly enough to buy everything. Purchasing power in hands of producer of X plus purchasing power in hands of producer of Y etc = Total Price of X plus total price of Y etc. Thus, the producers can afford to buy everything.

The only glut will be of stuff that was made by malinvestments, which people won’t want to buy.

All this is true whether you photocopied Say’s Law or not, Bob. Maybe you should have read it, instead of photocopying it.

The paper is right here: http://arxiv-web3.library.cornell.edu/pdf/1410.1231v1.pdf The quotes are from here: http://newsoffice.mit.edu/2014/mit-computer-scientists-can-predict-price-bitcoin Devil’s Advocate: So MIT Guy. I bet you …Continue reading →